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Positive outlook for remainder of 2016

Positive outlook for remainder of 2016

• Annual economic growth to pick up towards 4% over the next couple of years.

• Still-lower interest rates likely, but the re-igniting housing market raises the risk of further lending restrictions.

• Global risks still lurk, as China navigates an economic transformation.

Gross Domestic Product growth is tipped to near the 4% mark for 2016, according to the latest ASB Quarterly Economic Forecasts.

As seen in the February report, it is the dairy sector dragging on the economy and, teamed with weak dairy production in the first half of 2016, will restrain overall growth into 2017.

ASB Chief Economist Nick Tuffley says the key influences outlined in the bank’s February report remain key drivers in propelling the country’s overall growth.

“Strong population growth, lower interest rates and, since its highs of 2014, the weakened NZD continue to work to drive growth,” Mr Tuffley says.

The report also forecasts the construction industry will regather momentum after slowing when the Canterbury rebuild hit its peak. The sector continues to be driven by strong population growth nationwide, as Aucklanders relocate to other regions.

Tourism continues as the poster child for the export sector, which has out-performed other major industries over the past year. And, it will continue to grow over the next year, particularly as China’s middle class expands in numbers.

“The bank expects the combination of these drivers to push per-capita growth back up to 2%; levels not seen since the highs of 2014,” Mr Tuffley says.

Competitive NZD
The competitive NZD has shown surprising resilience over the last quarter; the impact becoming increasingly evident in 2015. Although not expected to depreciate further, the NZD is likely to sustain at a level that keeps New Zealand’s export sector on a more competitive footing.

“We expect the NZD/USD to drift upwards over the remainder of 2016,” Mr Tuffley says.

Global risks continue to lurk

There are still a few potential speed bumps for the global economy which is heading for a slightly below-average performance throughout 2016, Mr Tuffley says.

“While China remains a key source of concern in the global economy, there are tentative signs of stabilising, and less instability in emerging markets have recently helped calm financial markets and firm up commodity prices,” Mr Tuffley says.

The bank continues to expect below-average global growth over 2016 followed by modest improvement in 2017.

Further interest rate cuts

Short term interest rates are currently sitting at historical lows and are likely to dip further, according to the forecast.

Developments since the March cut have tipped the odds towards further OCR cuts and ASB economists, in the report, think it is likely the RBNZ will cut the OCR by 50bp by August, 2016.

“However, with the inflation outlook arguing for lower interest rates, but the housing market heating up, there is a growing risk that the RBNZ will widen its investor lending restrictions to the rest of the country and come down even harder on Auckland,” Mr Tuffley says.


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